Legal systems will be critical, not just the tax breaks
Given how well over a third of just Nifty futures and rupee derivatives are traded outside India, due to both bad tax policy as well as a variety of foreign exchange controls, setting up a Singapore/Dubai-type offshore financial centre is one way to try and wrest back this market. The NIPFP report on finance SEZs pointed out, for instance, that with the global market on rupee derivatives around $70 billion a day, just the commissions on the trade—were the entire market to come back to India—could add up to R2 lakh crore a year. Add in the commissions on other businesses that can be conducted in a global financial centre, and the size of the opportunity could be several times higher—given that India is among the world’s fastest-growing countries with a thriving corporate sector, the size of even the India-generatedbusiness is going to grow manifold. Which is why Sebi has done well to announce—the finance ministry, RBI and IRDA will have to come up with a series of tax concessions and other relaxations as well—guidelines for international financialcentres (IFCs) such as the Gujarat International Finance Tec-City (GIFT) which, ifall goes to plan, will put them on a par with Dubai and Singapore. Since GIFT will be a test case, it is important India get the model completely right.India has a big base of moderately-priced finance professionals—the proficiency in mathematics also helps—and, once the tax laws and exchange controls are on a par with those in Dubai/Singapore, this will certainly help attract those wanting to do business. But getting top-notch foreign investment firms to move their businessto India will take a lot more than just tax concessions or exchange control laws that are on a par with the global best.
Getting investors to leave a Dubai or a Singapore will require, for instance, Indianlaws on dispute resolution to be as top class as they are in those jurisdictions. One reason for Dubai and Singapore’s credibility as a global financial centre is that their courts are manned by top-class professional who work efficiently—India’s legal system, by contrast, is time-consuming with cases taking decades to settle. A vital ingredient to getting top-class international financial centres will be to allow the Indian IFCs to have their own arbitration/judicial system that is unrelated to the rickety one on the mainland—if progress is not made on this front, it is difficult to see how an IFC will flourish. It is also difficult to see how an offshore financial centre can exist without world-class cities. In other words, while it is hard to imagine a GIFT looking anything like a Singapore or a Dubai in the near-term, it is a welcome start.